Wendell’s Donut Shoppe is investigating the purchase of a new $44,300 donut-maki
ID: 2473258 • Letter: W
Question
Wendell’s Donut Shoppe is investigating the purchase of a new $44,300 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,000 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,000 dozen more donuts each year. The company realizes a contribution margin of $2.00 per dozen donuts sold. The new machine would have a six-year useful life.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
What would be the total annual cash inflows associated with the new machine for capital budgeting purposes?
Find the internal rate of return promised by the new machine to the nearest whole percent.
In addition to the data given previously, assume that the machine will have a $20,000 salvage value at the end of six years. Under these conditions, compute the internal rate of return to the nearest whole percent. (Round discount factor(s) to 3 decimal places.)
Wendell’s Donut Shoppe is investigating the purchase of a new $44,300 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,000 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,000 dozen more donuts each year. The company realizes a contribution margin of $2.00 per dozen donuts sold. The new machine would have a six-year useful life.
Explanation / Answer
1) Annual cash flow
= annual cost savings + aditional contribution form 2000 donuts @$2/unit
= $6000 + 2000 x $2
= $10000
2)
IRR is the discount rate at which NPV will be zero.
NPV at 10%
= $10000 x PVIFA(10%,6) - $44300
= $10000 x 4.354 - $44300
= - $760
NPV at 5%
= $10000 x PVIFA(5%,6) - $44300
= $10000 x 5.076 - $44300
=$6460
By interpolation,
R = 5% + 5% * ((0-6460)/(-760-6460)) = 9%
c)
NPV at 10%
= $10000 x PVIFA(10%,6) + $20000 x PVIF(10%,6) - $44300
= $10000 x 4.354 + $20000 x 0.564 - $44300
=$10520
NPV at 20%
= $10000 x PVIFA(20%,6) + $20000 x PVIF(20%,6) - $44300
= $10000 x 3.325 + $20000 x 0.335 - $44300
= - $4350
R = 10% + 10% * ((0-10520)/(-4350-10520)) = 17%
Rate NPV 5% 6460 R 0 10% -760Related Questions
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